Rystad: Statoil’s Sverdrup Cost Reduction Outshines U.S. Shale

Norway’s Statoil (NYSE:STO) said on Wednesday that it had reduced the breakeven for the first phase of its Johan Sverdrup offshore project to below US$15 per barrel—a reduction that analysts at Rystad Energy described as outshining U.S. shale projects.

Together with better-than-expected Q4 results and an increase in dividend, Statoil said today that it had reduced the costs for the Phase 1 of Johan Sverdrup—the giant North Sea oilfield set to start producing oil next year—by almost 30 percent since its plan for development and operation (PDO) was approved in August 2015. The capital expenditures for Phase 1 are now estimated at US$11.2 billion (88 billion Norwegian crowns), down by US$4.47 billion (35 billion Norwegian crowns) from initial estimates.

Phase 1 is expected to start up in late 2019 with production capacity estimated at 440,000 barrels of oil per day. Johan Sverdrup—one of the five biggest oilfields on the Norwegian continental shelf—will be developed in phases, with the Phase 2 plan to be submitted to authorities in the second half of 2018. The breakeven for the full-field development of Johan Sverdrup has been improved to below US$20 per barrel, Statoil said today.

Since August 2015, Statoil has also boosted the range of the full-field resource estimate to 2.1-3.1 billion barrels of oil equivalents from 1.7-3.0 billion barrels of oil equivalents.

“Statoil’s relentless focus to reduce Johan Sverdrup’s development costs by 30% (NOK 35 billion) is indicative of recent offshore development cost trends. Their focus on simplification, design enhancements and execution efficiencies have made their offshore prospects competitive with North American shale projects,” said Matthew Fitzsimmons, VP Cost Analysis at Rystad Energy.

“On Sverdrup, Statoil has driven the breakeven cost down to about USD 15 per barrel – a truly remarkable achievement,” Fitzsimmons noted.

“North American shale, meanwhile, now has an average breakeven above USD 40, and is already feeling the impacts of a heated market. The number of completed wells per month has doubled since the trough in 2016. While this is challenging US shale costs with inflation, the Northern Atlantic region appears protected thanks to long-term contracts for key services such as drilling, subsea and surface facilities. We anticipate these offshore projects to build on their recent advantages and deliver greater shareholder value over the next few years,” Fitzsimmons said.

According to a Rystad Energy comparison of the unit cost development for shale versus offshore, shale projects excelled at reducing capex in 2015 and 2016. The offshore industry took more time to respond to the lower oil prices because of the longer duration of contracts and lead times for the projects.

“However, with rising oil prices, we now see that offshore will have superior unit prices compared to shale in the coming years,” Rystad said.